What Is a Food Industry ETF?

A food-industry ETF is an exchange-traded fund investing in food and beverage companies. This broad industry covers household consumer staples, restaurants, socially conscious food-related companies, grocery stores, and food distribution companies.

Some experts believe that investing in food and beverage companies is recession-proof, as no matter what the state of the economy, these sectors will continue to profit. While that may be true with basic consumer staples, that's not necessarily been true with restaurants, as the COVID-19 pandemic has made clear. However, as the economy recovers over the next few years, some food and beverage companies, and therefore by extension, ETFs that track them, should benefit.

Key Takeaways

  • A food-industry ETF is an exchange-traded fund that invests in food and beverage companies, among other items.
  • Investors who are interested in impact investing can find grocery items in socially conscious ETF funds.
  • There are not many food-industry ETFs available.
  • Food and beverage companies make up a majority of the holdings in consumer staple ETFs.
  • Trillions of global dollars go into the food and beverage industry every year.

Understanding a Food Industry ETF

As with other indexed ETFs, a food industry ETF aims to match the investment performance of its underlying index. Only a few ETFs invest solely in this sector. Still, food and beverage companies account for a large proportion of the holdings of consumer staples ETFs, which outnumber food and beverage ETFs.

The sector encompasses companies that manufacture and distribute a wide range of food and beverages, alcohol, and cigarettes. Subsectors can run the gamut, including wheat and grains, sugar, coffee, and livestock. Also included in the food industry sector are U.S. fast-food chains with a global presence, like McDonald's, Pizza Hut, and Starbucks. In addition, companies selling alcoholic drinks like wine and beer might be included in a food and beverage ETF, such s the First Trust Nasdaq Food & Beverage ETF.

ETFs that may benefit from higher food prices include the Invesco DB Agricultural Fund, the Teucrium Agricultural Fund, and the Invesco Dynamic Food & Beverage ETF, according to a recent Zacks article.

The Pandemic Impact on the Food Industry

Before the Covid-19 pandemic, the restaurant industry had been a growing sector, offering new ETFs for investors looking to capitalize on a changing industry shaped by an upsurge in consumer adoption of new technology, like food delivery service DoorDash, and Instacart. In summer 2021, restaurant holdings are rising as the restaurant market rebounds on the heels of more vaccinated Americans anxious to return to dining outside of their homes.

As countries begin to dig out of the financial avalanche caused by the pandemic, global food prices are on the rise. The Food and Agriculture Organization (FAO) Food Price Index, which measures monthly changes for a basket of dairy, meat, cereal, and sugar, hit nearly 10-year highs in May 2021, before easing slightly off those highs in June 2021. A slight decline in June 2021 in the prices of vegetable oils, cereals, and dairy was countered by a rise in sugar and meat prices. Nonetheless, the June 2021 Index was nearly 34% higher than the June 2020 Index, showing that pricing pressure remains. 

Other food-related trends that have spawned ETFs include “socially responsible” funds that focus on organics or companies with a positive track record on their relationship with the environment and social issues.

Special Considerations

Consumer staples generally perform well in periods of uncertainty, as demand for food doesn't dwindle. For example, in 2018, the Trump administration gave a tough talk on trade, which sparked fears of a global trade war. Those fears spurred investors to shift around portfolios and look to the consumer staples sector for a safe bet. That shift in the market came after the declining performance among household food industry names such as Kellogg Co, Sysco, and McCormick & Co in early 2018, which subsequently bounced back.

Fast forward two years to 2020, when the COVID-19 pandemic hit, and these same stocks held steady as consumers sheltered in place and ate their meals, including pre-packaged foods, at home. Those stocks are likely to continue to benefit as the economy recovers in 2021 and beyond.